You May Be Able to Contribute to a 401(k) and Roth IRA

Here's How You Can Contribute to Both a 401(k) and Roth IRA Each Year

One of the most common questions among retirement planning overachievers is whether they can contribute to both a 401(k) and a Roth IRA each year. While there are participation limits and restrictions imposed on both types of tax-advantaged retirement plans, many people will find they are able to participate in both. And if you can contribute to both of these tax-advantaged accounts, you should consider it. Your future retired self will thank you!

401(k) Eligibility and Restrictions

In order to contribute to a 401(k) plan, your employer must provide you with a plan. Unlike some other retirement planning opportunities, there are no income restrictions for 401(k) plan participation. Therefore, you could make $500,000 or more and still be eligible to contribute to your 401(k) plan. There are, however, limits on the amount you may contribute each year.

The maximum contribution amount allowed each year is affected by your age and varies year-to-year based upon any increase in the cost-of-living index (which reflects the inflation rate). For instance, in 2017 the maximum you can contribute to your 401(k) plan is $18,000 if you are under the age of 50 and $24,000 with the $6,000 catch-up contribution if you are over the age of 50. Keep in mind the 401(k) contribution limit is based on your actual contributions. Any employer matching contributions do not count towards the $18,000 annual limit for the 2017 tax year.

Benefits of a Roth IRA

Roth IRAs provide significant tax advantages in the form of tax-free income. You do not have to pay any taxes on the earnings in a Roth IRA as long as you've had an account open for 5 years and wait until age 59 1/2 to take out the earnings. Your original Roth IRA contributions (but not earnings) can also be withdrawn tax-free any time before you reach retirement. That makes a Roth IRA a great savings vehicle for other goals, like a buying a house or paying for grad school or a child's college education.

Some people even use Roth IRAs as a backup plan for their emergency savings. Another important benefit is that with a Roth IRA there are no distributions required until after the owner's death. 401(k) and traditional IRA investors are required to start taking distributions from those accounts beginning at age 70 1/2.

Roth IRA Eligibility and Restrictions

The first requirement to be eligible to contribute to a Roth IRA is that you or your spouse must have earned income. This simply means that you must have been paid a wage or have some type of earned income from employment. Roth IRA plans are available privately, not through employers, so you have to open up an account on your own with a banking or financial institution. Unlike a 401(k) whether or not you are eligible to contribute and your personal contribution limits are determined first by your adjusted gross income and then by your age.

To be eligible to contribute to a Roth IRA directly, your modified adjusted gross income cannot exceed certain levels, which are dependent upon your tax filing status. In 2017, individuals start losing their ability to contribute to a Roth IRA at $118,000 and the opportunity for direct Roth IRA contributions ends at $133,000. Married couples filing jointly have an income contribution that begins at $186,000. The ability to contribute to a Roth IRA disappears altogether once an individual or couple's income surpasses $133,000 and $196,000, respectively.

If you are eligible for the full contribution limit in 2017, you can contribute up to $5,500 if you're under 50 and $6,500 if you are 50 or over (assuming that your taxable income for that year is greater than the amount you contribute).

Can You Contribute to a Roth IRA and a 401(k)?

For most people the answer to this question is yes! As long as you meet the separate eligibility criteria for both a 401(k) and a Roth IRA, you can contribute to both. No restriction exists whereby your participation in one of the two retirement plans prevents you from saving in the other. So go ahead and maximize those retirement savings!